Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds.
Right now no one is getting to issue new bonds at all. Banks cannot lend because the risk rating on these bonds has gone up, meaning they in-fact need to sell said bonds to reduce their risk exposure.
Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.
Covenants on their other bonds mean that if the corporation defaults on any of their bonds, all of the bonds become callable. It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses.
Thus the Fed and US Government are/should be acting to avoid any such rapid deleverage. It took Japan 2 decades to reduce leverage in the corporations. Without intervention the US could undergo this same deleveraging in a matter of months. It would throw the American people into such a deep poverty the likes of which we've not seen since the great depression.
Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
We are also talking about companies that are leveraged to the tits to juice their return on equity. What is glossed over in all of these discussions about bailouts is that the managers of these corporations respond directly to financial incentives, and the existence of a "lender of last resort" such as the Fed ensures that corporations will tend to leverage their balance sheets far beyond a level commensurate with the actual risk of the underlying business.
> We are talking about companies which have plenty of assets and strong businesses.
Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.
This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?
The equity holders are eating the losses; have you seen the stock market?
> Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.
Money is being temporarily created and lent, in exchange for collateral (bonds) to avoid a lack of liquidity caused by decreasing asset values and more hesitant lenders. Once things go back to normal, the money will be destroyed since corporations will return the money in exchange for the asset again. The net currency devaluation is 0.
There are no actual free markets and there never have been; governments exist and always intervene in the market, and even if they didn't have something like the Fed executing monetary policy, there's typically the option of “past, present, or future taxpayers”; in the case of future taxpayers, often in part or in whole out of returns directly made from the gains from keeping the businesses afloat rather than letting them fail.
> And so the charade will continue.
What “charade”? It would only be a charade if the government pretended that monetary and fiscal policy wasn't part of the system of the economy, which it does not.
I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation?
We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1]
[0] https://www.usinflationcalculator.com/inflation/historical-i...
[1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...
Q: rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while? Enact a law putting a temporary patch on how contract law works vis-a-vis financial instruments?
Something like... any covenant with triggers written after date X would now be required to be written to include additional language Y; and any covenant triggers written before date X would be implicitly interpreted as if they did contain language Y. Language Y specifies that the activation of the covenant is suspended when the government says a certain named financial-market state "Z" pertains; and, when state "Z" is declared as having ended, only then would the covenant be evaluated for activation, based on the present state of the debtor, rather than its state during the historical period during condition "Z". Effectively, the covenant wouldn't be able to "see into" whatever happened during "Z" to apply its triggering logic to it.
(I'm picturing here how you can, in an RDBMS, create constraints that don't validate until a transaction is complete, such that you can temporarily put a table into a constraint-violating state during the TX, and—as long as you fix things before the end of the TX—everything will be fine, and the trigger won't run.)
Changing the rules of massive bilateral agreements to benefit one party over another tends to blow confidence in the system. Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)
It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased. It's in a liquidity problem, not a solvency one. But if the liquidity problem persists, the firm will go insolvent.
Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort.
A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid.
That's completely unfair to one side of the transaction.
Here's an example:
Let's say that in 2010, I bought a million in bonds from various sources.
Let's say that in 2010, you sold me some bonds.
Let's say that your proposal goes through, and the government just declares that contracts will not be enforced.
That would completely punish ME at YOUR benefit.
Even if the US could allow US companies to default for a year without penalty, the Chinese companies expecting coupon payments wouldn't receive the funds they use to operate. They would then have to default on their Chinese obligations.
If Chinese companies can't pay their debts in China, China faces huge pressure to devalue or inflate. They're unlikely to adopt the forgiveness rule. Emerging markets are at the end of this game of crack the whip.
Edit: ah yes shareholders lose money but that's the game. Retirement pensions? If you are not for socializing it then it's the game too.
The parent here ^ seems to understand the nuance, that a lot of Fed decisions are for the CREDIT markets, not the stock markets.
I highly recommend reading the Greenspan or Bernanke biographies to hear what, and why, they use the levers that they do. There is simply too much nuance in financial markets and the Fed to play arm-chair politics about whether it is effective or not.
I just wrote a thread [0] responding to a joke going around about our first response to everything being to lower interest rates.
[0] https://mobile.twitter.com/elamje/status/1242129602040008704
The response to 2008 wasn't a problem in isolation, but continuing that policy into 2010-2019 was. Rates even started going up slightly a year ago, but then got nipped in the bud to keep the stock bubble rising.
I'm willing to agree that at this current point, these bailouts seem quite prudent. The problem is that after the crisis is over, the hazardous financial and business practices that necessitated the bailouts will never be reigned in, but allowed to continue thus necessitating another bailout in the future.
Which ones would you recommend? The autobiographies?
Do they? That's kind of a big assumption here. If the virus is going to have a major negative effect on their ability to deliver value, then that means they aren't (currently) sound businesses, and the market is correctly marking down their value.
There could definitely be fiscal -- and epidemiological! -- measures that can reverse this state. However, to buy up the bonds without those measures doesn't change the fundamental soundness of the business; it just loads up the Fed's balance sheet with garbage.
There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago.
Your point about buying bonds not changing "fundamental soundness" is like saying keeping someone from dying of an acute condition doesn't cure their illness. It still keeps them from dying right now! What is the advantage of causing a preventable catastrophe, just because everything eventually ends?
https://docs.google.com/document/d/1YbtJGn7ida2IYNgwCFk3Sjhs...
We need a consistent approach across the board -- small businesses, individuals, etc. Pausing the economy makes much more sense than targeted bailouts to specific industries.
That's where the problem lies. Who is going to decide that? Traditionally we have debt markets for that.
As corporate bonds get more risky banks are not allowed to hold as much of them. Triggering sales, which increases the risk, and thus triggers more sales.
Banks are fine, it is the corporations which need to re-issue bonds that are going to hit a wall.
Then landlords can't pay their expenses, and will default on their own payments
This trickles up all the way to the banks and could result in their insolvency, which is what the Fed is (rightfully) trying to prevent
> these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
Are the measures being taken now just adding another layer onto the "house of cards" as some people describe it?
Will these measures just make it all fall harder at some point in the future?
The Fed has an enormous amount of flexible firepower, it’s tough to sit back and not do everything you can to stop economic turmoil. They launched the most simulative economic policy of all time and stocks dropped today. If only there was action in other executive arms and congress.
Technically true, but I would argue misleading (note: not implying intent on your behalf).
"We are talking about companies which have plenty of assets and fragile, taxpayer supported businesses" contains kind of the opposite message of your statement, yet this statement is also technically true.
> Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.
Again, technically true, under the circumstances we find ourselves in. But might the existence of the Fed, and its past policy responses to such events, have possibly creates an environment of moral hazard whereby events like this are practically guaranteed?
> Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
This seems like a bit of a false dichotomy to me, as if letting the house fail or bailing them out (once again) in this fashion are our only two options.
In a true capitalist system, the US government would receive equity in all the companies they bail out.
At some point I think it would be a good idea for us to admit to ourselves what kind of economic system we really have in the West, and try to determine if it is up to the task of competing with China and their economic system, which to my eye is clearly superior (based in part on observable relative performance in the last 20 years).
Pitchforks, torches, and nooses if necessary.
Also, it's not great to use a politically provocative username. That ends up having a politically provocative effect on every thread the account posts to. If you want to stick around and use HN as intended, we can rename the account for you if you email hn@ycombinator.com.
The US today is more communist than China. The US tends to make fun of China's government for still calling themselves 'communists', but now the tables have turned and I wouldn't be surprised if China starts to make fun of the US for calling themselves 'capitalists'.
I agree that more needs to be done directly for folks who have already lost their jobs or will soon, but that type of stimulus would require an act of Congress, who apparently can't get their collective heads out of their own asses at the moment.
I appreciate (and indeed once shared) the knee-jerk libertarianism of the people saying "let them fail", but this view does not fully appreciate the consequences of allowing a violent deleveraging such as we're experiencing now to continue indefinitely.
FFS, these "strong businesses" are so extremely fragile that they are liable to go bankrupt because they can't roll over some of their debt. And now the Fed just wants to let them roll it over again consequence free.
A libertarian purist would say that money creation shouldn't be government controlled; but given that it is they should at least do a good job of it.
None of those things are real except as emotional gates on social agency so the privileged under the law can get first dibs.
Remember Thiel & Trump, probably the rest, really believe romantic notions like tough guys must rule as “that’s the way society has to be because that’s how it has always been”.
Trump literally said it the other day and Thiels ramble was posted here recently.
Too big to fail, eh? If that were true, there is no point having technical bailout as a possible state for companies to be in. Just remove it as a legal option and given them a permanent exception from having to do anything if the situation arises.
The justification is flimsy. If the businesses were any good they wouldn't need a bailout. They'd get new owners ad carry on as before. Capitalists are perfectly capable of putting an operation on ice for a few months for all that it would be painful and disruptive. Businesses go bankrupt because they are bad businesses and the economy is signalling the resources should be redeployed.
I can agree that the bailouts are going to happen; but these bailouts have been set in stone since 2008. Once 'give money to the wealthy and powerful to preserve the status quo' was identified as an acceptable solution it was going to become the default solution to any and all crisises. Someone could have come up with a better plan in the last 10 years but there was no incentive to.
If their businesses were so strong, they shouldn't have taken a loan that would jeopardize them so easily. The Fed should let them default and take all their cronies down with them. Give the system a good clean by wiping out the parasites.
A lot of these so-called 'strong' companies had been using debt as a way to evade taxes... And now that their highly unethical schemes are about to crumble, we bail them out?
The Fed are aggravating the 'too-big-to-fail' problem. They're turning every corporation into 'too-big-to-fail'. If we continue down this path, we'll end up with communism. It will be the worst, most perverse form of communism ever invented.
1. Lots of businesses would fail, and we would experience another great depression. 2. You don't like populism now? The risks of outright fascism (beyond what you could say we already are experiencing) would go up exponentially.
The main problem with the Ron Paul acolytes is they think that society wouldn't have a massive breakdown in the face of an extremely deep depression - it would just be "the smart entrepreneurs would buy up the assets and build something better!" - but they never talk about how they would deal with the breakdown in democracy and basic government systems that would be a likely result.
* The current crisis, starting now, in 2020;
* The global financial crisis from 2008 to the early 2010's;
* The dotcom, telecom, and tech bust of the early 2000's;
* The Asian debt crisis of the late 1990's;
* The Latin America debt crisis of the 1980's;
* The oil shock and stagflation crisis of the 1970's;
In each of these crises, a significant swath -- or all -- of the world's financial infrastructure has seized up, requiring government intervention to prevent collapse.
A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks.
Judging by the regular seize-ups, it doesn't seem to be.
Particularly this time around, healthy and well run businesses following reasonable best practices are being decimated. And why shouldn't they? A large percentage of our economy was just shut off.
Add in leverage - which isn't inherently a bad thing - and suddenly you have a recipe for disaster with a system wide increase in debtors needing to default.
We need government intervention because the free market solution to half of businesses being forced to close, is for those businesses to go under and their employees to starve and their banks get squeezed and so on
A business with zero debt financing would not go bankrupt during this crisis, but they would still have to lay off employees in the meantime, and those employees might "starve" without another source of income.
I really, really don't understand the need to bail out companies here. If the problem is a loss of income for the employees, then strengthen unemployment insurance. If the underlying business was sound, then it will start back up again when the crisis is over. If the owners of the business were leveraged and cannot sustain debt payments during the crisis, then they can go into bankruptcy protection and emerge with new ownership.
Normal actions by the Fed are not tantamount to bailouts.
The Fed exists just as much to bail out the rich as it does for anything else.
It's a massive and existential form of systematic inequality.
'We need the government to intervene' - ok, but then 'we' also need to take ownership of said companies and allow the feckless investors to eat dirt.
Then maybe they can price in risk more effectively, which is what recent market rallies indicate they won't do.
Imagine what stock prices would be without the looming guarantee of bailout ...
Of course it isn't. If you go back in history even further, the pattern continues. That was the reason why Keynes' General Theory was developed. But people still refuse to believe that the instability is internal to the (capitalist) system. The economic theory needs to move away from equilibrium towards fully dynamic models, for example those that Steve Keen is developing.
Something about the lure of "everything will be different" and subpar internalization of the lessons of the past just seems to end up causing unholy amounts of pain in the long run.
People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.
Printing money isn’t going to create customers for businesses effected by this pandemic.
Apparently it doesn't, markets are down, in spite of the promise of infinite money.
I think whether we bounce back quickly will depend on how the next few months go and whether countries manage to contain the virus in time or it starts to overwhelm healthcare systems.
This doesn't seem like a huge public health issue, but it is.
Stopping the market slide gives the public health officials like Dr. Fauci a bit of breathing room. Continued stock market slides will cause politicians to panic and demand lifting of restrictions, even if they're the only thing helping right now.
The financial system is built on itself so that loans create money. It does not expect to come to a grinding halt. If it does, loans aren't repaid, and money literally disappears. Deleveraging occurs. Wealth disappears.
I think the aim is that we don't lose money from defaults over the short term.
The market is demanding liquidity to be able to manuver an uncertain future; this has caused an effective collapse of the credit market due to demand. Much like there's no TP on the shelf, there's no credit on the shelf; the fed however can print a lot of money if it wants to which ironically enough, can then be invested to print TP. If everyone has cash in the bank account, they feel secure, and that in of itself will stop the stock market from collapsing further.
The way they avoid inflation is by providing loans at a rate under the rate of inflation; free money, but it has to be paid back and over a reasonable term. This will expand the amount of money in the economy for a time.
History will remember this as is a perfect storm; the medical industry has been a tremendous burden on government and employers backs in the form of an unscrupulous blackbox of spend. A couple million deaths especially of elderly patients is going to upend the medical industries cash cow and at the same time force a hard look at what the industry is doing to be prepared for pandemics like this one. If you have cash going into this downturn, now's the time to start plotting where you are going to invest it for maximal gains.
Also, there is no situation so bad that it can't be made worse, and companies laying people off makes it worse. There are bills to pay and people still need to buy food.
And as far as I know this Fed policy isn’t to buy failing stock it’s to inject cash overall through treasury bonds, since the Fed isn’t allowed to buy stock.
Not an expert on this but decreased money velocity (the thing we witness right now) can be seen from the outside in fact as "lack of money".
If low V is due to exogenous factors -- like a virus making their products ultra-low-demand -- then no, that's not a problem of lack of money.
There absolutely is a lack of liquidity, that's why you see all these stock sales.
To name just one example, lots of companies have been buying back stock on margin because of extremely cheap loans. That stock is now worth far less, the loans keep maturing, new loans are harder to get and more expensive. So how do you raise cash? Sell stock. The cycle continues.
How did we get there? Not being over-leveraged in times of cheap money is a competitive disadvantage.
> People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.
They are also not going to work in many cases, supply chains have been disrupted, production has been slowed. That's a lot of income that has either disappeared or been put into question. That income is supposed to turn into spending, that spending is supposed to be someone else's income. It's a vicious circle.
The problem isn't so much what people are doing now, but what they're (not) going to be doing months down the line, and the uncertainty surrounding that.
> Printing money isn’t going to create customers for businesses effected by this pandemic.
Pretty much every business is affected by this pandemic. Without injecting liquidity, a massive wave of bankruptcies is going to follow suit in short order and the whole economy is going to go tits up.
You can argue that liquidity shouldn't have been injected in the past years during "the greatest economy of all times", but that milk has been spilled.
Imagine what the economic impact of the virus alone would be if there weren't lockdown pleas all over the news, social media, even highway signs. It would be close to zero now, and if Spanish Flu teaches us anything it would be negligible even at the peak.
So, the government is killing the economy. Hence, the government is also trying to prop it up. I suspect it won't end well either way.
I understand if you're against the idea of giving people money. But this is just giving money to mostly the rich. Neo-trickle down economics.
The Fed doesn’t have the legal authority to do this. That’s why the Congress is passing stimulus bills.
The Fed is focussing on our liquidity problem. That keeps solvent companies from going under due to illiquidity.
Congress, and helicopter money, are needed to solve the solvency problem prompted by demand destruction.
- The Fed operates under a dual mandate. It is tasked with managing both inflation and unemployment.
- Its mechanisms are "open market operations" (the purchase and sale of assets, usually government bonds, though occasionally other securities), "the overnight window" (a lending operation for banks needing cash, lent at a benchmark "prime" interest rate), and bank reserve requirements.
These adjust the total amount of dollars in the financial system, the basis for interest rates (the cost of renting money), and the multiplier by which banks themselver create money through loans.
Is the argument that the Fed is better than private households in being a distressed investor? Or that wealthy households would decide to cash in the check from the government and literally store it under their mattresses instead of investing it (directly or indirectly) and add to the liquidity?
It's not either-or, it's both-and.
* https://twitter.com/paulkrugman/status/1241690862448529408
Helicopter money is revenue negative and the created cash cannot be recovered.
Creative destruction is nearly absent as an engine for growth in the US economy, and we are all suffering from the lack of innovation that would otherwise occur.
> With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907, and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day.
No amount of buying corporate debt will keep people employed.
This is to artificially reflate asset prices.
https://mobile.twitter.com/elamje/status/1242129602040008704
https://www.washingtonpost.com/business/2020/03/23/fed-unlim...
https://www.nytimes.com/2020/03/23/world/coronavirus-news.ht...
https://www.wsj.com/articles/federal-reserve-announces-major...
https://www.foxbusiness.com/business-leaders/fed-takes-actio...
https://www.ft.com/content/b71f0c32-6cfb-11ea-89df-41bea0557...
https://www.theguardian.com/business/live/2020/mar/23/market...
https://www.reuters.com/article/us-health-coronavirus-usa-fe...
(Feel free to add others here.)
The only step remaining is for the Fed to begin buying stocks. The Bank of Japan has been doing this (by buying ETFs) for some time now. That bank now owns ~80% of the Japanese ETF market.
If you're retired, this is possibly good for you. Reducing bond yields to 0 is usually very bad for pensions and retirees... But maybe you've got a lot of equities?
Unfortunately there's no political capital to be saved with such a decision.
They literally went from -700 to +400 in 30 seconds.
"Woe to him who accumulates what is not his—For how long?—And who makes even greater his own debt! Will not your creditors rise up suddenly? They will wake up and violently shake you, And you will become something for them to plunder" Habakuk 2:6,7
Every financial crisis in recent memory is caused by excessive debt by some party.
- Consumers - Homeowners - Financial institutions - Corporate institutions - Governments
It's stunning how poorly this problem of excessive reliance & use of debt has been tackled by governments and regulators.
That, despite debt being well known as a source of financial meltdown for centuries!
Even with all the research, regulations, and rules on the book, this well-known problem of recurring debt crises has remained unsolvable by world leaders.
That means we've moved toward a financial system with one single point of failure at the top. It's got quite a lot of mass and weight, but if it fails everything else does. This is not dissimilar from the Chinese model, which means America is now (perhaps unintentionally) copying China.
This also means short sellers should beware: even if you are nominally correct, the market may defy your logic because something else is backstopping everything.
Private profit, public risk. 'Tis lame.
You're trivializing the issue. It's not just "inflating stock prices". Credit markets that are required for the basic functioning of the economy have completely frozen up.
Companies that are completely solvent can't meet short-term obligations because the commercial paper market has frozen. Money market funds, which are basically savings accounts, have fallen below par despite only containing short-term high-quality bonds that would never default in any reasonably scenario. Repo markets are forcing mortgage providers to de-leverage positions (which will in turn lead to foreclosures) based on the fact that there's no liquidity for the collateral. International trade for basic and necessary goods in the supply chain has grinder to a halt because banks are no longer extending trade finance.
Whether you like it or not our economy is completely dependent on having a well-functioning "money market", where short-term bonds, notes, and IOUs from high-quality issuers are used interchangeably with cash. And it's been this way for at least 150 years. Once the money market stops functioning economic activity grinds to a halt.
At least in 2008, there was maybe some moral hazard argument against the Fed intervening. From 2001-2007 banks and other financial institutions were playing fast and loose with their risk. Maybe in 2008 it might have made sense to let banks stew in the financial crisis they created to teach them a lesson.
But in this crisis what would be the point? This is a pandemic that came out of nowhere, that nobody could have possibly been prepared for. "You guys should have really had a contingency plan for global quarantine" doesn't make sense. I'm not even that big a fan of the Fed, but if there's any time ever to print money to prop up the economy, it's in the middle of a literal global pandemic when the government can already borrow money at zero percent interest.
also many asian countries were better prepared due to their exposure to mers/sars [2]. so there was a precedent and influential people calling for change
but investing health infrastructure is not the Fed's job, that is congress/government's job - AKA the job of corporations through lobbyists who have no incentive to do any type of preparation, just perpetuate the consumption cycle
the fed is just responding to an economic crisis by trying to bail water out of a sinking boat, but they don't have the power to actually rebuild/fix that boat
[1] https://www.ted.com/talks/bill_gates_the_next_outbreak_we_re...
[2] https://www.ft.com/content/e015e096-6532-11ea-a6cd-df28cc3c6...
This is similar to when companies continually complain about a "talent shortage" from not able to hire people, when the real reason is that they just don't want to pay market rates. There is an easy answer to obtaining business credit - pay the current interest rates, which have gone up due to uncertainty. Instead, the Fed is telling everyone that interest rates are even lower because they want to perpetuate the stock market bubble.
Our reality is about to stray pretty far from any reasonable scenario.
https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...
> Which companies will the Fed give free money to? Which companies will they allow to fail? How low should corporate borrowing costs be and for which companies? How much debt should they allow each company to carry? What if companies issue bonds to buyout competitors? What if a company defaults on the Fed? The Fed can’t answer any of these questions. That won’t stop them from showering America’s largest and most indebted companies with free cash
https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.h...
[1] https://qz.com/1140322/check-out-the-swiss-central-banks-ins...
The scale of BOJ's ETF purchases is quite something.
They announced they will buy municiple bonds also.
https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expan...
> If Congress changes the rules to allow the Fed to purchase stocks
Corporate bonds first. If that fails, then stocks. Baby steps.
It's those MBS that were the real problem. Total panic on Wall Street with those, because everyone is so heavily tied into them and with all these unemployed people, foreclosures are going go through the roof.
Now that they can offload them to the Fed instead of trying to sell them for pennies on the dollar, it's all champagne and caviar back on Wall Street.
This is absolutely bonkers territory. 10,000 years from now, I wouldn't be surprised if archeologists find money between the rock layers.
This was exposing that.
Once you start with this shit, you never get out of it. The market starts pricing it in, and if you ever try to back off, asset prices fall, and that's the end of the world to the 0.001%.
See us with 0% rates since 2008. See Europe with negative rates since 2012. See Japan since 1989.
We will have a zombie economy if this happens, just like Japan.
It's my opinion our economic system needs a major overhaul, one that is preppered to address real situations like this without setting unrealistic growth expectations across the board and better stabilizing the majority of the workforce/labor market.
This national economic stress businesses are feeling is quite similar to the stresses a large portion of the US workforce/families feel every single day/week in respect to future financial stability, risk valuation, growth, etc. It's about to get even worse for most Americans and may strain mass acceptance economic policy and acceptance of our system. That questioning of the system may be a good thing.
I don't think a knee jerk correction where many are hungry, suffering, rioting, without healthcare, etc. is the way about correcting these problems to be clear.
It doesn't seem like the issuees we're seeing will gradually self-correct (concentrated wealth, increased wealth inequality, massive barriers to entry in markets, declining workforce/labor economic growth, ever consolidated market share to fewer big businesses...)
Perhaps this is the invisible all-knowing hand of the market self-correcting?
Can you explain why you think Fed purchases would cause stock market soar instead of decline to slow down a little?
https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...
https://www.ft.com/content/cf485398-689d-11ea-800d-da70cff6e...
If you define FED as a private entity - this sounds like theft.
If you define it as a part of the government then you are transitioning to socialism (government ownership of means of production).
Neither of these sounds like something that would be acceptable in the US political system - am I missing something here ?
Frenzied grand constructions, wars and great rituals are among the common responses of ancient leaders to crises. These demonstrate powerful responses by the leaders (enhancing their threatened hold on power), but almost never really address the problems themselves. A cynic might characterize the giant U.S. stimulus bill of 2009 as such an effort.” -Arthur Demarest
There are money runs on funds causing liquidity issues. Funds sell assets to market makers for cash to give rich people their money. This causes a downwards spiral and asset prices plunge.
Now, the fed will continue to buy assets (eg. but not limited to corporate bonds which have tanked and taken out a couple firms and MMs) so that rich people can liquidate their assets.
We will be bag holders as the fed will own corporate bonds that – frankly – the existing financial system players expect to default. We take the hit and own junk so that wealthy people can extract money now.
This is the high level to my knowledge. Please add more colour and correct me if there are things that I'm missing :)
Yes, it "works" because it has to, i.e. there's no defined scenario of it not working, apparently nor the Great Depression, nor 2008, nor measures like these still don't mean anything as far as it not working, so it works because it apparently never does not work, no matter what.
P.S. I don't mean to claim capitalism 100% does not work and socialism does, merely that maybe we need a healthy mix of both?
The Zimbabwean dollar is not the world's reserve currency. Zimbabwe cannot park a naval fleet off the coast of any country that tries to move away from the Zimbabwean dollar, or direct the worlds largest banks to freeze assets, or apply crushing economic sanctions.
The US is probably the only country in the world that can print money without runaway inflation, and I don't doubt that we will maintain dollar hegemony with force if needed.
Once you satisfy all that, high inflation just means you’re either spending too much, or not taxing enough.
A big part of what happened in Zimbabwe, by the way, was that land reforms caused a massive collapse in food production (a major part of their economy) and unemployment skyrocketed. They spent a lot in response (also having foreign denominated debt I believe), but mostly not focused on policy that would increase capacity. At the same time, they were having to spend much of their foreign reserves on food because of the supply collapse. So the spending and hyperinflation were inevitably consequences of previous mismanagement.
